Essay About Hurdle Rate And Discount Rate

Marriott Corporation: The Cost of Capital
Note, we are using the hurdle rate (minimum rate of return required to accept the project) as the discount rate in performing a discounted cash flow, to make decisions for the hotel management regarding project investments and repurchase of shares. The main benefits of this include:Calculating NPV to determine operating strategy. If the hurdle rate is too high, some profitable projects may be eliminated, potentially slowing the total growth rate.Determining incentive compensation, increasing awareness for managers in deciding Marriott’s financial strategies.Conversely, the traditional way ignores the differences of the major lines of business. Namely, they are lodging, contract services, and restaurants. Though not wrong, we believe it is not as precise as we would like. Firstly, concerning the working period, the lodging service’s working period is longer than that of either lodging or the restaurant business. Secondly, when it comes to risk, the WACC can only measure investment of similar risk class. However, the three different businesses are not comparable in this manner. Thus, in order to make our valuation more precise, we need to calculate the WACC for each line of business separately, while taking into consideration each one of their respective features.The Lodging divisionUsing the market value weighted unlevered beta for , MARRIOTT, as market leader in hotels, maintains a large market share. Its value weighted beta is quite reasonable. [pic 1]Lodging IndustryArithmetica Average ReturnEquityb BetaMarketc Leverage1987 Revenues ($ billions)D/Eeffective tax rateUnlevered BetaMARRIOTT–Lodging   2.67   HILTON 13.30.7614%0.770.160.440.70HOLIDAY 28.81.3579%1.663.760.440.43LA QUINTA-6.40.8969%0.172.230.440.40RAMADA 11.71.3665%0.751.860.440.67WEIGHTED AVERAGE beta_u      0.5451.41[pic 2]